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ACCT 2310 Accounting Principles I

ACCT 2310 Accounting Principles I. Dr. Robert R. Oliva Professor and Chairperson Department of Accounting University of Arkansas at Little Rock. How to obtain class files:. http://www.cba.ualr.edu/rroliva/. Chapter 1: Introduction to Accounting and Business.

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ACCT 2310 Accounting Principles I

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  1. ACCT 2310 Accounting Principles I Dr. Robert R. Oliva Professor and Chairperson Department of Accounting University of Arkansas at Little Rock

  2. How to obtain class files: • http://www.cba.ualr.edu/rroliva/

  3. Chapter 1: Introduction to Accounting and Business

  4. So you want to go into business? • 1. What kind of a legal entity is the business going to use? • 2. What business strategy will be implemented? • 3. What is the business going to sell? • 4. Who is going to be involved in the creation and continuing support of the business (stakeholders)? • 5. What kind of data will the stakeholders want and who will provide it? • Recording and Summarizing • Financial Statements • Financial Analysis

  5. 1. What kind of a legal entity is the business going to use?

  6. Types of Business Entities • Sole propietorships • Pass-Through Entities • Partnerships • S corporations • LLCs • Corporations

  7. Sole propietorship • One owner • No separate existence • Business MTR = individual’s MTR

  8. Advantages • No independent taxation • Losses serve as tax shelter to other income

  9. Disadvantages • Net profit taxed to owner when reported whether received or not • Owner is not an employee • Self-employment tax • Same tax year • No liability shield

  10. Pass-Through Entities • Partnerships • S Corporations • LLCs

  11. Partnerships • 2 or more persons • Independent entity from owner • Conduit/flow through: does not pay taxes

  12. Advantages of a Partnership • Entity is tax exempt • Partners able to withdraw and contribute affecting only adjusted basis • Debt basis

  13. Disadvantages • Net profit taxed to owner when reported whether received or not • Owner is not an employee • Self-employment tax

  14. Types of partnership • General • Limited • Family partnerships • Publicly traded partnership

  15. Family Partnerships • Real or sham? • Two kinds of partnerships based on what is the material income producing factor • capital • services • In service partnership, a partner family member must provide substantial services • In capital intensive partnerships: no as much of a problem

  16. LLCs: Limited Liability Companies • State created entity • Taxed as a partnership • Unlike partnerships (and similar to corporations): members have limited liability • Unlike limited partners: LLC members may participate in management

  17. Advantages of LLC’s (versus S) • not limited to a specific number of members • not limited to one class of stock • not limited to kinds of shareholders • Non-shareholder debt basis

  18. Advantages of LLC’s (v. LP’s) • No need for GP with personal liability • All members have limited liability • All members may participate in management

  19. Advantages of LLC’s (v. GP’s) • LLC members do not have personal liability

  20. Advantages of LLC’s (v. Sub C’s) • LLC’s may be taxed as pass through entities • Has similar provision as IRC 351, without the need of control and can be used at anytime without concern for control [IRC 721].

  21. Limited Liability Partnership • Like GP: severally and jointly liable for LLP’s liabilities arising out of other than malpractice. • From partnership to LLC: no tax consequences

  22. S Corporations • Hybrid • Advantages/disadvantages • Very similar to partnerships • Very similar to corporations

  23. 2. What business strategy will be implemented?

  24. What is a “business strategy”? (6)

  25. Business Strategies • Low cost (7) • Differentiation (8) • Combination

  26. Dangers • Low cost: Competition offering lower prices or using a differentiation strategy. • Differentiation: • Company may offer more than what the customer wants, followed by competition offering what the customer wants at a lower price. • Company is so successful that everyone has bought the product. Followed by competition offering a new twist. • Combination: Trying to be too many things to too many customers.

  27. 3. What is the business going to sell?

  28. The Value Chain • Take “inputs”, apply a “process”, and end with a product or service to sell. • Consider the “process”: • Manufacturing • Retailing • Service industry • Capital intensive • Service intensive.

  29. 4. Who is going to be involved in the birth, life, and, hopefully not, death of the business? Who are the “stakeholders”? Internal stakeholders? External stakeholders?

  30. Internal stakeholders • Owners • Managers • Employees

  31. What do they have in common?

  32. A need for reliable data Owners? Managers? Employees?

  33. External stakeholders • Customers • Creditors • Government

  34. What do they have in common?

  35. A need for reliable data Customers?Creditors?Government?

  36. How are the business stakeholders going to be provided the much needed “reliable data”?

  37. 5 Steps (11)-(13)

  38. Who will implement?

  39. ACCOUNTANTS!

  40. Accounting as a Profession • Private v. Public Accounting • Specialties: • Financial: Report preparation under GAAP • Auditing: Evaluation of the representation • Management: Data providers to management • Cost: Determining product costs • Tax: Compliance and Planning • AIS: Designing computer financial systems to collect and secure data. • International: Collecting, analyzing, and reporting data involving international trade • NFP: Reporting operations of not for profit organizations • Social Accounting: Measuring social costs and benefits for (mostly) public and private actions.

  41. Problem 1-2A: Chickadee Travel • How much money did it make last year? • Prepare an income statement

  42. Accounting Data: The need for standardized procedures • GAAP: Generally Accepted Accounting Principles • From research, to practice, to official pronoumcement • Financial Accounting Standards Board (FASB) • Statements of Financial Accounting Standards • Interpretations • Thus emphasis on principles and concepts

  43. 4 Basic Accounting concepts • Business entity • Cost • Objectivity • Unit of measure

  44. Business entity concept • Defines what is the business being measured. • If you own 4 different businesses, how do you keep track of profitability?

  45. Cost concept • At what price should your “inputs” be recorded? • Assume you bought a building for your business, should it be recorded at the price paid or the appraised value? • Need to use exchange price

  46. Objectivity concept • Accounting records and reports must be based on objective evidence. • Using historical cost.

  47. Unit of measure concept • Record in dollars.

  48. Exercise: • We have a good idea about the cost of our car. • But we have a harder time in determining its current value.

  49. The Accounting Equation (18) • Assets = Liabilities + Owner’s Equity • Every business transaction, e.g., one that affects a business’ financial condition, impact the Accounting equation. • Every business transaction is an increase or decrease in the equation variables. • But the equation is always balanced.

  50. Recording and Summarizing Business Transactions Based on the Accounting Education • Chris Clark and Net Solutions (p. 14) • Jim’s Lawn Care

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